2 March 2013

Life in the Boardroom (2)

Every year I participate in a survey published by Directorbank Group, a search firm, and MM&K, a remunerations consultancy, on ‘Life in the Boardroom’. Three years ago I blogged on this in ‘Life in the Boardroom’ (published 20th February 2010). I thought I would return to the subject to see what has changed in that time. The survey is the largest and one of the most authoritative of its kind and indeed has increased its coverage over three years incorporating the current opinions of 502 chairmen and non-executive directors (up from 442) holding 1,328 appointments on listed, private equity-backed and private company boards (up from 1,170). It is supported by the Institute of Directors and the Quoted Companies Alliance.

2012 has again proved to be a challenging year for chairmen and non-executive directors with a variety of boardroom issues creating national headlines from international corporate tax planning to the LIBOR scandal to the mis-selling of PPI. Although the first primarily involved international corporations avoiding tax in the UK and the latter two were examples of further bad behaviour by the banks nevertheless their contagion affected the reputation of business as a whole and the resulting calls for ever more restrictive legislation and tighter governance affect us all.

The much-trumpeted ‘shareholder spring’ seems to have genuinely taken root with a marked increase in engagement of shareholders with companies. The binding votes on remuneration that come into force this year will undoubtedly encourage further engagement, but whether it leads to a fundamental and long term change in corporate behaviour remains to be seen. There is as much scrutiny of boardroom pay as ever and, whilst there has been undoubted progress in curtailing some of the more obvious ‘rewards for failure’, there is still the concern that the ‘war on greed’ will in fact become a ‘war on wealth creation’. It might be surprising to learn that the vast majority of NEDs surveyed practice what they preach by displaying remuneration restraint. 82% did not have a pay increase last year and 84% do not expect one this year.

Another area of progress is that of women on boards. 23% of the NEDs surveyed are female. However, this drops to 12% of Executive Directors suggesting that the glass ceiling is more firmly in place for those who wish to climb the executive ladder, but non-executive roles are by their nature more open and allow for outsiders with different backgrounds to come in to add to the overall diversity of a board, not just by mixing genders but also by mixing experience.

The NEDs’ most important role is constructively challenging and helping to develop proposals on strategy. Responsibilities for people and pay issues received a lower ranking, indicating that, compared to strategy, it is relatively easy to recruit, motivate, incentivise and reward high calibre executives. The most important skill cited by those surveyed is the ability to challenge other board members. Independence and objectivity are also ranked high in desired skills as is prior experience of issues likely to face the board. The ability to challenge other board members is highly desired, but asking difficult questions in the right way is a tough path to tread. 65% disagree with the statement “NEDs who are perceived as ‘difficult’ are side-lined or marginalised”; however, a significant minority of those surveyed (18%) agree or strongly agree that such NEDs are marginalised. Is it too fanciful of me to think that this 18% are the difficult ones who think they are marginalised while the 65% think they have difficult colleagues but they don’t go so far as to marginalise them?

This was no doubt at the root of the problems in the financial services industry as NEDs seemed to be asleep at the wheel on the job and were unwilling, or unable, to ask difficult questions. These are worrying results which many boards would be wise to discuss. Having a bit of grit in the system could save some companies from disaster. Getting the right balance between wasting time, efficient process and constructive challenge requires great skill from the chairman.

It is clear that Culture and Ethics are discussed more often these days. The corporate scandals of recent years are stimulating debate in boardrooms as never before – the crux of the conversation is essentially to what degree does the business’s perceived moral obligations impact on its duty to generate returns for shareholders. The survey could not investigate how culture is measured so instead it focused on some of its key components. 88% agreed that “the culture of the firm is a key factor in the board’s decision making” and only 4% disagreed. However, the majority conceded that in their companies “the desire to compete and win is given a higher priority than trust and ethics” perhaps giving support to the populist view that companies have little regard for ethics. However, 87% of those surveyed believe that NEDs should intervene on the basis of morality and attempt to influence decisions made by executives regardless of whether the executive team has made a decision within the law.

Whilst it could be interpreted as a positive that 56% of NEDs are not in favour of aggressive tax planning, it still means that 30% are neutral and therefore one may suppose be unwilling to challenge such behaviour. A further 14% are actively in favour of aggressive tax planning. This represents a challenge if Government believes such behaviour needs to be curtailed. No doubt such NEDs can claim support for their views in the long established fiduciary duty to achieve the optimum return for shareholders within the law, even though the Companies Act of 2006 assigns them broader responsibilities to all stakeholders including the community.

The final question asked on culture was about process. The vast majority, 59%, agree that quoted company boards are spending too much time on process, whether this is on corporate governance matters, risk studies or other quasi-legal duties. In contrast private equity-backed companies seem to be more focused on making decisions and getting things done. Whilst there may well be an element of a lack of understanding of the importance of process in a FTSE 100 company, and even an element of bias on the part of mid-market PE-backed firms, the scale of the opinion (59% agreeing that plcs are too process oriented) suggests that there needs to be at least some degree of ‘rebalancing’.

In the 2010 survey I noted the worrying difference between chairmen and NEDs in the way they rated the board’s effectiveness. This difference is still there despite greater efforts to assess boards but on closer analysis it varies by size of business. In the largest companies the chairmen are less confident in their own assessment of the boards’ effectiveness than were their non-executive directors. The report believes “these findings further highlight the need for collective board training, particularly in private groups and reflect rather badly on certain chairmen whose overriding responsibility is to ensure that the board is an effective unit to represent shareholders, lead the company and plan for the future”.

86% agree with the statement that the chairman’s role is more demanding than 5 years ago. The causes for this probably lie both in greater public scrutiny and in the difficult economic environment. Another factor could be the massive technological changes that are highly disruptive to business models in some sectors. One only has to think of the devastation in the high street caused by online shopping. However, we should also remember that the majority of participants in the survey are themselves chairmen. And there seems to be no shortage of able candidates willing to take on chairman roles.